Kerrisdale Capital Management, a private investment management firm and beneficial owner of approximately 360,000 shares of Lindsay Corporation (NYSE: LNN), issued the following letter on Friday, October 25th urging the management of Lindsay Corporation to consider new shareholder representation to the Board:
Dear Mr. Parod, Mr. Christodolou, and other Members of the Lindsay Board,
Kerrisdale Capital Management is the beneficial owner of approximately 360,000 shares of Lindsay Corporation. We believe that Lindsay is an overlooked stock with a world-class irrigation business that benefits from agricultural expansion in high-growth international markets. At its current share price, Lindsay trades at just 13.7x FY 2014 P/E, a figure too low given Lindsay’s industry-leading position and promising secular growth trends. While we commend management’s long-term operational performance in the core irrigation business, we believe that the shareholders may be well served by increased Board representation from the shareholder community.
Lindsay’s management team boasts an enviable track record. Over the past decade, Mr. Parod and his team have expanded Lindsay’s irrigation business faster than its largest competitor, introduced several market-leading technologies, and aggressively sought expansion in emerging markets. These efforts have been rewarded by a 17% compounded EPS growth rate from FY 2003 – 2013 and a return on invested capital that surpassed 30% in the last fiscal year. During the temporary market corrections of FY 2005 and 2009, Lindsay still managed to generate positive free cash flow using manufacturing efficiencies and prudent working capital oversight. Overall, we believe management’s operating execution has proved exemplary.
However, on the issues that fall into the domicile of Board oversight, our assessment is less glowing. Lindsay maintains an overcapitalized balance sheet and its capital allocation plan is ambiguous. Over the past five years, Lindsay has accumulated $100 million of cash on its balance sheet, such that net cash currently comprises $150mm, or more than 15% of the company’s market capitalization. Lindsay’s cash balance has earned less than 1% annually over the past five years, while Lindsay’s return on equity has ranged from 10% to 20%.
Management has suggested that the large cash reserves would allow the company to react quickly to a potential acquisition target. Yet Lindsay hasn’t made an acquisition larger than $35 million in over two decades. That $35 million acquisition was of Barrier Systems, Inc. in 2006, a business that is currently breakeven and that we believe to have been a suboptimal use of capital and management attention.
Furthermore, given that Lindsay’s underlying irrigation business achieves terrific returns on invested capital and its international growth opportunity is tremendous, we question whether a large acquisition is sensible, as opposed to the company continuing to reinvest in its first-rate irrigation business. Tuck-in acquisitions may make sense, but such small acquisitions do not justify the company’s large cash balance.
Finally, if Lindsay were to pursue a large acquisition target, we think that the company could adequately raise the necessary debt financing to complete it. Lindsay’s seasoned management team, leading competitive position and highly cash flow generative business model would enable the company to incur debt financing at attractive rates.
We partially attribute management’s focus on M&A and willingness to hold a large cash balance to the Board’s structuring of management compensation, which is based on revenue growth and margin targets while failing to address return-on-capital metrics. Arrangements such as these can lead to ‘growth for the sake of growth’ and poor capital allocation decisions.
If management strongly believes in acquisitive growth and diversification outside of irrigation, we believe this transformation could be best achieved as a private company. Not only would a private owner look past the public market’s fixation on quarterly results, they’d likely be more receptive to aggressive expansion into new industry segments. Moreover, Lindsay’s overcapitalized balance sheet, strong free cash flow generation, and secular growth trends make it an ideal private equity target. Worryingly, the staggering of Lindsay’s Board into three separate term periods make potential third-party approaches more difficult. If interest is received, we hope it would be fully considered.
We believe that Lindsay may benefit from new shareholder representation on the Board. Kerrisdale urges management to engage with the shareholder community to consider nominating shareholder representation for the two seats available this year. We would recommend considering third-party individuals with applicable experience in corporate oversight and capital allocation.
Given management’s long track record of operational excellence, we’re proud to be invested alongside a truly first-class set of operators. We believe the suggestions set forth in this letter will serve to further enhance the company and its value.
We remain open to a constructive conversation with management and the Board.
Sincerely,
Sahm Adrangi
Chief Investment Officer
Kerrisdale Capital Management, LLC
About Kerrisdale Capital Management, LLC
Kerrisdale Capital Management, LLC is a fundamentally-oriented investment manager that focuses on long-term value investments and event-driven special situations. Kerrisdale has $265 million in assets under management and is based out of New York City.
For further information please contact:
Sahm Adrangi
Chief Investment Officer
Kerrisdale Capital Management, LLC
1212 Avenue of the Americas, 3rd Floor
New York, NY 10036
Telephone: 212.792.9148